The budget deficit poses an interesting political economy problem for the Democrats. During the Clinton years, the party committed itself to a program of fiscal discipline and balanced budgets. As a long-term strategy for managing the country’s economy, this seems to me to have been a good one. But as Paul Krugman writes, “it’s now clear that while Rubinomics made sense in terms of pure economics, it failed to take account of the ugly realities of contemporary American politics.” In particular, the politics of fiscal restraint have turned out to be a shell game. Ronald Reagan comes into office and cuts income taxes. The results, huge and incredibly acute deficits. Then along comes Alan Greenspan and his Social Security commission. They raise FICA taxes (which fall much more heavily on the middle- and working-classes than do income taxes) over and above what’s actually needed to finance Social Security in order to “pre-fund” the system.

In practice, this merely allows the non-Social Security portions of the budget to remain in steep deficit thanks to Reagan’s combination of income tax cuts and defense spending hikes. Then Bill Clinton comes into office, and raises taxes and restrains spending growth in order to get the budget under control. Then along comes George W. Bush who promptly cuts income taxes again, leading to the re-explosion of deficits. Krugman again: “With the benefit of hindsight, it’s clear that conservatives who claimed to care about deficits when Democrats were in power never meant it. Let’s not forget how Alan Greenspan, who posed as the high priest of fiscal rectitude as long as Bill Clinton was in the White House, became an apologist for tax cuts — even in the face of budget deficits — once a Republican took up residence.”

Thus, I agree with Krugman’s conclusion. The country can live with modest-sized deficits even if it might be better to live without them. Democrats should try to avoid increasing the budget deficit, but shouldn’t expend their time, energy, or political capital on reducing it either: “By spending money well, Democrats can both improve Americans’ lives and, more broadly, offer a demonstration of the benefits of good government. Deficit reduction, on the other hand, might just end up playing into the hands of the next irresponsible president.”